March 30 2009 post

Here’s what I said back a couple of years ago.

Unfortunately, not much has changed (including my suggestion at the time in an earlier post that it was all a pretty good environment for stocks which could easily double).

Review of the recession and how to end it

March 30th, 2009

  1. The problem is suboptimal output and employment which is evidence of a lack of aggregate demand.
  2. Less important what caused the drop in aggregate demand
    • The end of the subprime expansion in 2006 reduced the demand for housing
    • The wind down of the one time Q2 2008 fiscal adjustment (Q2 2008 GDP was up 2.8%)
    • The Mike Masters inventory liquidation that began in July 2008 added supply from inventories, reducing output and employment
    • A shift in the propensity to spend due to the pro cyclical nature of credit worthiness


  3. My proposals for restoring aggregate demand:
    • A full payroll tax holiday – This tax is taking $1 trillion per year from workers and businesses struggling to make ends meet $1,000 per capita in revenue sharing for the States (approx. $300 billion total).
    • Federal funding for a $8 per hour full time job for anyone willing and able to work that includes federal health care.
    • Caveat – Unless our demand for motor fuel is cut in half, restoring aggregate demand will also empower the Saudis to set ever higher prices for crude oil which will cause our real terms of trade and standard of living to deteriorate.
    • Political options for reducing imported fuel consumption:

      • Regressive – utilizing allocation by price (Carbon tax, fuel taxes)
      • Closer to neutral – mandating higher fuel economy requirements for new vehicles, offering incentives to trade up to more fuel efficient vehicles
      • Progressive – substantially reducing speed limits to discourage driving and advantage public transportation


  4. Redirect banking to serve public purpose
    • Ban banks from all secondary markets.
    • Allow bank lending only to serve public purpose.
    • Do not use the liability side of banking for market discipline.


  5. Analysis of current situation
    • Our leaders believe they must first ‘get credit flowing again’ to restore output and employment.
    • Unfortunately the reverse is the case; restoration of output and employment will restore the flow of credit.
    • Government is removing about $1 trillion per year in payroll taxes from employees and employers who can’t meet their mortgage payments and wondering what is causing the financial crisis.
    • All moves to date by the Treasury and Federal Reserve have only served to shift financial assets between the public and private sectors. Nothing has directly added to aggregate demand.
    • Therefore the economy has continued to deteriorate, with only the ‘automatic stabilizers’ slowly adding financial assets and income to the private sector, as the counter-cyclical deficit rises.
    • The rate of federal deficit spending (not counting TARP and other shifting of financial assets that does not directly alter demand, as above) now exceeds 5% of GDP and seems to have begun moving the economy sideways.
    • The new fiscal package starts taking effect in April. While modest in size, it isn’t ‘nothing’ and will further support GDP.
    • Employment will not grow until real output of goods and services exceeds productivity growth.
    • Fuel prices are already moving higher.


  6. Conclusion
    • Leadership that doesn’t understand how the monetary system works has needlessly prolonged the recession and delayed the recovery.
    • They have put a premium on ‘confidence’ as the President spends countless hours in front of the TV cameras, when in fact loss of ‘confidence’ means only that federal taxes can be lower for a given level of federal spending:

      lower confidence = less private sector spending = less aggregate demand = lower taxes or higher federal spending to sustain output and employment

    • The headline USD trillions they have directed towards the financial sector has accomplished little or nothing beyond burning up expensive political capital and credibility.
    • They are in this way over their heads, and it’s costing us dearly.
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26 Responses to March 30 2009 post

  1. Will Richardson says:

    Surely cutting taxes appeals to the rigth, and cutting Jobs Taxes should appeal to everyone?

    On inflation, we have the problem that the pounds fall in value and the VAT increase from 15-20% over 2 years have combined with higher raw material prices to push prices up in the short term.

    On fuel economy, What Car did an interesting study in the UK and found that whatever kind of car/SUV used, cars were most fuel efficient at 40mph as this is where wind resistance/drag overcomes the more efficient fuel economy of higher gears.

    Given that the mean speed of a longer journey in the UK is 50mph given no traffic jams, considerably less fuel could be used for not much loss of time…I think that there’s also a view that traffic flows are more stable at that level.



    i had proposed the uk suspend all vat when the economy tanked in this last go round.

    unfortunately your fearless leaders think they need the tax revenue to be able to spend.

    that is, they wrongly fear the uk could become the next greece.


  2. Stafford says:

    Sorry, I forgot to credit Jesse’s Cafe Americaine for the quote above. Also, the last sentence in the post should finish as “essentially empire-driven.”

    May I suggest that an “edit your post” function be added for posters?


  3. Stafford says:

    Keep it simple. Personally, I find this convincing, and if you can really counter this, I think you’ll have won a victory (just see the last note, which you’ll have to integrate somehow–I don’t see how):

    The limit of the Fed’s and Treasury’s ability to create money is the value and acceptance of the dollar and the bond in market transactions.

    The Weimar government never ‘ran out of money.’ Zimbabwe never ‘ran out of money.’ And if interest is paid ‘in your currency money’ you can never fail to service your debt either.

    What they did run out of were people willing to take their paper at its intended value, from the outside in. Outside means those who are exterior to their compulsion of legal tender.

    This is why the system breaks down unless you can extend an ever greater circle of coercion of paper valuation. Without the complicity of a few well placed allies like the Saudis, the dollar would already be done.

    It really is that simple. That is what makes it a sophistry. “I can print money, therefore I can never go broke.”

    There is nothing modern about it. It is a just a ponzi scheme with a sovereign backstory. It is just the same old song with slightly different words of imperial hubris and overreach, back to the days when King Canute disproved the limits of the will to power to his advisors.

    (now, in addition, remove the enforcement of the dollar regime by the US military, and see the result). I think Jesse is right. It is ultimately sophistry, despite operational accuracy, and the optical illusion is essential empire driven.



    ponzi means you have to borrow to make payments, so that particular word doesn’t apply to the federal govt and payments in it’s own currency

    the govt does have the option to spend on a price constrained basis rather than a quantity constrained basis (see mandatory readings, etc. thanks!)

    yes, there’s nothing modern about it.

    and yes, real spending power is a function of taxing authority and available real resources.


    Greg Marquez Reply:

    Let me give it a try. His analysis is okay but it’s his conclusions which are suspect. He says: “Without the complicity of a few well placed allies like the Saudis, the dollar would already be done.”

    It is true that this could happen but how did he determine that the dollar is already effectively done. Lets do a little thought experiment. Imagine that the government rises up in unison tomorrow and declares that we will no longer accept imports from any country. If Jesse’s Cafe Americaine is correct it wouldn’t make any difference to anyone. Nobody would care because they don’t want any more dollars. Is that what you think would happen? I imagine there would be an outcry like the world has never heard, particularly from the Chinese and the Saudis and the Japanese.

    If Jesse’s Cafe Americaine is correct then nobody would be trying to sell us anything. Put differently, if the dollar has no value why are so many people from all over the world working day and night trying to figure out how they can trade labor and resources to try and get these little pieces of valueless paper.

    MMT doesn’t deny the possibility of inflation. What it says is that the danger of going bankrupt and the danger of inflation are two entirely separate things and the danger of the Federal Government going bankrupt is a fiction.

    If the “fiscal crisis,” really had any relation to the value of the dollar then we should be experiencing huge amounts of inflation already and we’re not. If the fact that the Federal Governments “debt” is 10 times what it was in the ’90s really had some economic effect we’d be experiencing runaway inflation already. The “fiscal crisis” is the result of artificial debt limits which have no relation to the level of dollars that the Government can put into the economy without causing inflation. What that level is nobody knows, but we haven’t reached it yet.

    One last point that is rarely mentioned. There is no neutral position in inflation – deflation. That is, there is no position which hurts no one and benefits everyone. Inflation hurts people who are owed dollars at fixed rates of interest but helps people who owe dollars. Deflation hurts people who owe dollars at fixed rates of interest and helps people who are owed dollars at fixed rates of interest. Put a little differently creditors are the ones fighting against inflation and hoping for deflation, debtors are the ones who should be hoping for inflation and fighting deflation. I don’t think the American people have realized how this works yet, even though this same economic argument has occurred several times in our nations past.


    Tom Hickey Reply:

    The global problem is lack of demand, which is lack of money in consumers hands to spend. Since spending power comes from income, there is a shortfall in income. Income results from investment. So this is an investment shortfall. Lack of investment is due to insufficient capital, capital misallocation, malinvestment, or excessive saving. Given the savings level, a principal cause of the problem seems to be leakage in that direction, which needs to be corrected through changing incentives and also temporary government injections.


    Craig Reply:

    lack of demand or spending power also comes from reducing taxes – hence the recommendation for a payroll tax holiday


  4. Rice Bingham says:

    Progressive – substantially reducing speed limits to discourage driving and advantage public transportation

    This is not a political option in the U.S. North Korea maybe, but not in any nation that resembles any kind of democracy.


  5. Craig says:

    Thanks for the repost Warren. I reread your “proposals for banking” and my big take aways was private lending based upon real assets as opposed to financial assets which would reduce speculation. The other being banks lending directly to borrowers keeping loans on their own balance sheets. This keeps the lender/borrower relationship in tack and removes the conflict of interest a bank faces when it is allowed to both lend to and underwrite for a company (Glass-Steagall). That is, a commercial bank may exploit its dual role as lender and underwriter to force a company to issue public securities and use the proceeds to repay the bank loan. In essence, the bank may shift the risk of a bad loan from itself to the market. Likewise, as we’ve seen in the current crisis when banks are allowed to both lend and sell off its assets (securitization) they are not accountable for the credit worthiness of the loan. What triggered the credit crunch was the failure (or near- failure) of the banks that issued (or acquired) the mortgages. Perverse incentives can develop when you separate the lender from the borrower.

    On another I reread your 7 deadly sins and your ideas for a tax holiday what form do you think the tax structure should ultimately take. Something like a flat tax of 20% with deductions of 20k per adult and 7k per dependent. I’m guessing the net gain of whatever form it takes is the decrease in administrative costs to increase aggregate demand.



    i lean away from transactions taxes when we don’t want to discourage those transactions, which keeps bringing me back to a federal real estate tax as a replacement for most other federal taxes, including the income tax.


  6. Greg Marquez says:

    This is where MMT, which I think is correct, gets into trouble. By linking “progressive” solutions to problems which have nothing to do with MMT you undermine MMT in the minds of non-progressives.

    For example your political options for reducing imported fuel consumption are all options from the left. How about drilling? Now my point isn’t about environmentalism it’s about undermining MMT among those who haven’t drunk the Global Warming Cool-Aid. As I tell conservatives: Federal Government bankruptcy is to the right, what Global Warming is to the left, something with no basis in fact, very little in theory, and something which is very dangerous to small children and other living things.

    MMT is a little difficult to understand and when you link it to progressive ideas it gives purchase to the claim that MMT is just a progressive Ponzi scheme. If you want to convince anyone, other than progressives of the truth of MMT then you need to stop linking it to the unrelated goals of progressive politics. (That and stop using jargon and acronyms and maybe spend $10,000 and get a nice 5 minute animation of the theory done.)

    Love the idea of a payroll tax holiday, I think there are many on the right who would like to see that as well. Keep up the good fight.


    Tom Hickey Reply:

    Futurist Ray Kurzweil Isn’t Worried About Climate Change

    Most of Kurzweil’s prognostications are derived from his law of accelerating returns—the idea that information technologies progress exponentially, in part because each iteration is used to help build the next, better, faster, cheaper one. In the case of computers, this is not just a theory but an observable trend—computer processing power has doubled every two years for nearly half a century.

    Kurzweil also believes this theory can be applied to solar energy….

    Today, solar is still more expensive than fossil fuels, and in most situations it still needs subsidies or special circumstances, but the costs are coming down rapidly — we are only a few years away from parity. And then it’s going to keep coming down, and people will be gravitating towards solar, even if they don’t care at all about the environment, because of the economics.

    So right now it’s at half a percent of the world’s energy. People tend to dismiss technologies when they are half a percent of the solution. But doubling every two years means it’s only eight more doublings before it meets a hundred percent of the world’s energy needs. So that’s 16 years. We will increase our use of electricity during that period, so add another couple of doublings: In 20 years we’ll be meeting all of our energy needs with solar, based on this trend which has already been underway for 20 years….

    And I think there are reasons besides climate change to move away from fossil fuels—that whole oil spill, remember that, that’s not climate change, that’s just pollution. But I don’t see a disaster happening before we can get there because it is pretty soon at hand.


    danw Reply:

    Agreed: Taxes do NOT represent (the ability of the) gov’t to spend. So…let’s go with the tax holiday. What happens next. Where do people spend these monies? I know that Warren sees consumption as a GOOD thing, and sees an obsession with production as anathema to the goal of growth.

    The “dilemma” I see is that, once made available, money is spent without oversight. So, trillions in liquidity are made available by the Fed., and those monies are used by speculators to front-run open market operations and to bid up the prices of commodities, etc. The average middle class individual uses his money to purchase more “stuff”, and in doing so actually ends up being enticed into financing those things he cannot pay for out of his newly-found dollars.

    In the near term, the old measure of growth—consumer spending, which accounts for 70%, or some 10 trillion dollars of U.S. GDP—is complimented. But the system that precipitated the meltdown remains intact. In fact, many hundreds of billions of dollars in newly found monies are recycled into a private sector that is pretty much ALL Ponzi-style finance. A few people get rich, while a whole lot of people go further into debt or are left holding the bag when the next collapse occurs.

    This is not an MMT issue, of course. It is a brain science issue. Fear and greed—the rear-brain stuff that guides the actions of most of humanity—always wins the day. Providing more money, or liquidity, or WHATEVER, for people in the near term only encourages them to exploit the system for personal gain…and in the end, no TRUE solution is realized.

    Today at the school at which I work, I listened to a youth minister tell his “life story” to a bunch of incipient proselytes. While his story was moving, and his spirit generous, what struck me most was how he was encouraging the kids to TRUST GOD…not to be self-reflective, or self-examining. Not to be OK with being sad. Not to sit quietly with their fears and insecurities and greed and passions, and to examine them…no, just TRUST GOD.

    And of course, trusting God is another way of saying, trust your brain chemistry. “Fake it til you make it.” Get on your knees and pray, even if you don’t believe…because if you do it enough belief will come. Simple neuro-science.

    I see our monetary-Capitalist-consumptive economic system in a similar way. No alternatives are being proffered…neither from the mainstream, NOR from MMT. And the bottom line in this is that billions will STILL suffer in poverty.

    (Yes Yes Yes…I know. Social and normative and political vs. Operational.)



    consumption is the only point of working and producing goods and services. if we don’t want any more goods and services we can take the day off and play golf.

    unemployment is people trying to sell their labor for dollars who can’t find paid work. if they have sufficient goods and services and don’t want to work for any more dollars no problem!

    as i’ve said before, if people want to work and get paid and not spend their income that’s fine- the output can be public goods and services that are not offered for sale.

    and the institutional structure can be adjusted to achieve any combo of available real options.


    Matt Franko Reply:

    Hi Dan,

    “The average middle class individual uses his money to purchase more “stuff”,”

    Dan let me try to calibrate a bit for you here. There is much propoganda out there that the US consumer is a spendthrift, etc.. how we over-consume, etc.. blah-blah.

    The preliminary retail sales number for January is 312B ex-autos. So divided by the 312M us citizens works out to probably less than $1000 per month per US citizen. that includes food, clothing, and some pharma, also gasoline to drive to work, home maintnenance, etc… Does this seem like over consumption to you? If the person was working 160 hrs per month, it would be $6 per hour. It may seem reasonable to many.

    Another thing about this propoganda, it sort of plays off of the “fiscal conservative” type of norm. Yankee thrift. “Never a borrower or lender be” type of thing. This leads to a projection of these types of personal spending disciplines directly onto the ‘govt as a household’ type of absurd analogy by the fiscal conservatives who think the Federal budget should be balanced, etc…. this is bad.

    Dan, in these cases, where you find yourself perhaps distressing or getting worried about where the country is heading, it may be a good thing to go to the hard data for some perspective, and to test whether the mainstream propoganda jives with the hard facts.. the people who spin this stuff are trying to create headlines to sell media and do not care about how a decent/caring person like yourself may experieince pain because of their so-called reporting and fear mongering.

    Dan, that minister may have been motivated by the KJV translation of Matthew 5:3 “Blessed are the poor in spirit” that is a bad translation that I think has been/is a major problem in Christendom. A correct translation from the original Greek would be “Happy, in spirit, are the poor”. The word ‘poor’ from the Greek ‘Ptochos’ meaning “lacking the means of subsistence”, it was an economic term that Christ used. And if you apply stock/flow consistency, it could literally be translated as “the unemployed”. This was a message of consololation that Christ was giving to those who were economic victims and would not embrace the corrupt/unjust economy of those days, a message that we should be hearing more of today, vice the one you witnessed. I’m afraid this mistranslation is leading many to teach a message today that makes it “acceptable” to be victims, or somehow appropriate to be sad or abused, ie “poor in spirit”, it is 100% BS imo. This is a false doctrine.

    Dan be well, I enjoy that you share your observations here. Resp,


    danw Reply:

    Hi Matt,

    The only point I was trying to make is that it’s a really big world, and there’s a whole lot of suffering going on, and no macroeconomic theory will change the propensity for humans to respond to their “rear” brain impulses—particularly that of fear, and its bed fellow greed. No big deal, I suppose.


    problem with more US drilling is that even an extra million bpd after 10 years won’t lower the price, though it sort of helps the balance of payments thing a bit if imported oil does fall from where it would have been.

    also, i like saving our oil for when everyone else runs out. especially when using it now won’t lower the price.

    not sure if that’s progressive or not.


    Tom Hickey Reply:

    It’s being street smart. :)


    ESM Reply:

    “also, i like saving our oil for when everyone else runs out. especially when using it now won’t lower the price.”

    Not sure if that’s a progressive sentiment or not, but it’s certainly non-sensical.

    First of all, extra production will lower the price. Whether it’s material to the average person is not really the issue. It is material in the aggregate. How much is it worth? Well, it is worth X*1MM/day where X is the price of a barrel of oil. Perhaps a drop in the bucket as far as our GDP is concerned, but so is almost anything. On top of that, if the price drops by Z, the Saudis would get Z*10MM fewer dollars per day, if you care about that sort of thing.

    Does storing it make sense? Well, no, because the reality is that the lack of drilling in various places has nothing to do with economics (even with all of the externalities factored in). It is due to knee-jerk environmental fundamentalism. If the restricted areas were opened up, even with the proper environmental regulations and taxes in place, the oil companies would rush in there immediately. If they thought that oil would go up in price enough in the future, or drilling costs would come down enough in the future, they would let the oil sit instead.

    I actually think the probability that new technologies come on line in the next 20 years that make oil uneconomic is fairly high. If so, then it is best to get it out of the ground now while it is still worth something to humanity.



    with a monopolist/swing pricer like the Saudis how does extra production lower price? They just set price and let their quantity adjust.

    ESM Reply:

    Also, I think your view of imported oil is not consistent with your other views. Imports are a benefit for every other good or service. Why not oil?

    Every time I hear somebody advocate “energy independence” I immediately think, “well, there’s somebody that never took Economics 101″ in college.

    Perhaps it’s because you have something against the Saudis? Well, I’m no fan, but for the most part they’re just taking our dollars and tossing them on top of a very big pile.



    Imports are benefits. The problem is when dependency subjects us to a foreign monopolist demanding ever higher real terms of trade. That is, we have to export more and more to get the same amount of oil.

  7. mike norman says:

    What new fiscal package? The tax cuts?


  8. Dave Begotka says:

    Do you still think its ignorance?



    I’m thinking…


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